iFLYTEKLTD (SZSE:002230) Is Carrying A Fair Bit Of Debt

Warren Buffett famously said, 'Volatility is far from synonymous with risk.' When we think about how risky a company is, we always like to look at its use of debt, since debt overload can lead to ruin. We note that iFLYTEK CO.,LTD (SZSE:002230) does have debt on its balance sheet. But should shareholders be worried about its use of debt?

When Is Debt Dangerous?

Debt and other liabilities become risky for a business when it cannot easily fulfill those obligations, either with free cash flow or by raising capital at an attractive price. In the worst case scenario, a company can go bankrupt if it cannot pay its creditors. However, a more common (but still painful) scenario is that it has to raise new equity capital at a low price, thus permanently diluting shareholders. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we examine debt levels, we first consider both cash and debt levels, together.

Check out our latest analysis for iFLYTEKLTD

What Is iFLYTEKLTD's Debt?

As you can see below, at the end of March 2024, iFLYTEKLTD had CN¥6.97b of debt, up from CN¥3.33b a year ago. Click the image for more detail. However, it also had CN¥2.68b in cash, and so its net debt is CN¥4.29b.

How Strong Is iFLYTEKLTD's Balance Sheet?

The latest balance sheet data shows that iFLYTEKLTD had liabilities of CN¥11.7b due within a year, and liabilities of CN¥8.15b falling due after that. Offsetting these obligations, it had cash of CN¥2.68b as well as receivables valued at CN¥14.0b due within 12 months. So it has liabilities totalling CN¥3.14b more than its cash and near-term receivables, combined.

Of course, iFLYTEKLTD has a titanic market capitalization of CN¥99.7b, so these liabilities are probably manageable. However, we do think it is worth keeping an eye on its balance sheet strength, as it may change over time. There's no doubt that we learn most about debt from the balance sheet. But ultimately the future profitability of the business will decide if iFLYTEKLTD can strengthen its balance sheet over time. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year iFLYTEKLTD wasn't profitable at an EBIT level, but managed to grow its revenue by 12%, to CN¥20b. We usually like to see faster growth from unprofitable companies, but each to their own.

Caveat Emptor

Over the last twelve months iFLYTEKLTD produced an earnings before interest and tax (EBIT) loss. To be specific the EBIT loss came in at CN¥362m. When we look at that and recall the liabilities on its balance sheet, relative to cash, it seems unwise to us for the company to have any debt. So we think its balance sheet is a little strained, though not beyond repair. However, it doesn't help that it burned through CN¥3.7b of cash over the last year. So suffice it to say we do consider the stock to be risky. When analysing debt levels, the balance sheet is the obvious place to start. But ultimately, every company can contain risks that exist outside of the balance sheet. For example - iFLYTEKLTD has 1 warning sign we think you should be aware of.

Of course, if you're the type of investor who prefers buying stocks without the burden of debt, then don't hesitate to discover our exclusive list of net cash growth stocks, today.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.